I'm a Fellow at the Adam Smith Institute in London, a writer here and there on this and that and strangely, one of the global experts on the metal scandium, one of the rare earths. An odd thing to be but someone does have to be such and in this flavour of our universe I am. I have written for The Times, Daily Telegraph, Express, Independent, City AM, Wall Street Journal, Philadelphia Inquirer and online for the ASI, IEA, Social Affairs Unit, Spectator, The Guardian, The Register and Techcentralstation. I've also ghosted pieces for several UK politicians in many of the UK papers, including the Daily Sport.

Can Robert Reich Actually Do Arithmetic? Apologies, But Yes This Is A Serious Question

Robert Reich takes to the pages of The Guardian today to tell us all that it would be a great idea if all retail stores just paid their workforces more. This may or may not actually be true but what I want to point to is the seeming ignorance even of basic arithmetic that the piece reveals.

The paper underlying his analysis is this one. The one I rather hoped was a result of the newly legalised cannabis rather than anyone actually thinking that such an odd view of the economy could actually be true. But Mr. Reich manages to take matters further.

He’s here. I’ll not comment on his views about inequality: that’s politics and not my remit. I want to look just at the numbers he uses.

At the peak of its power and influence in the 1950s, the United Auto Workers could claim a significant portion of GM’s earnings for its members. Walmart’s employees, by contrast, have no union to represent them. So, they’ve had no means of getting much of the corporation’s earnings.

Walmart earned $16bn last year (it just reported a 9% increase in earnings in the third quarter of 2012, to $3.6bn), the lion’s share of which went, instead, to Walmart’s shareholders

A little bit of basic accounting would be nice here. Earnings are, of course, the amount that goes to shareholders after the employees have been paid. So it isn’t, indeed cannot be, true that the “lion’s share” of earnings went to the shareholders. Earnings are what the shareholders get.

And if you want to do it a little differently, to talk about gross earnings, that amount before the employees get paid, then let me assure you that WalMart’s wages bill is rather larger than the profits the shareholders earn. So it’s most certainly not the lion’s share that way either.

including the family of its founder, Sam Walton, who earned on their Walmart stock more than the combined earnings of the bottom 40% of American workers.

What? I mean, what?

There’s a couple of ways you can take “earned on their stock”. We might think of capital appreciation on it. The Waltons as a whole own just under half the company, the company is worth some $200, $220 billion at present, the share price has risen 15 to 18% or so this past year. So, to be generous, a little over the top, we might say they’ve had a capital gain of perhaps $20 billion?

Or the dividend yield is around and about 2% or so: so they got $2 billion in dividends perhaps? Very inaccurate numbers, yes indeed they are. But they are of the right order of magnitude. We’re in the couple of billion to a couple of tens of billions sort of region for the Walton family earnings from the family company this year.

So what do the bottom 40% of all American workers earn then? One number is that the bottom 40% of households earn $25k or so each. Say, 130 million households (about right, again, all these are very rough numbers) gives us 130 million x 0.4 x 25k….umm, $1.3 trillion? OK, OK, so perhaps it’s only workers, not households. What’s the median earnings in the bottom 40%? $10,000 a year? 130 million workers, 40% of them at $10k? That’s still over $500 billion.

I’ll agree that I sometimes don’t understand the world, have been known to make the most wondrous gaffes. But I’m deeply unconvinced that $2 billion or $20 billion is in fact a larger number than $500 billion or $1.3 trillion. I might even go so far as to say that that very thought is an expression of deep innumeracy.

Or let’s put it another way around. How much does each of the bottom 40% have to earn so that they in total get less than the Walton family? $20 billion / 130 million x 0.4 isn’t it? $400 a year? And I do think we all agree that the bottom 40% of American workers do earn more than $400 a year. No, seriously, despite the Great Recession, I think we do believe that.

I have a very strong suspicion that Professor Reich has misremembered a very different fact, this one I talked about here.

Different people will take this different ways, but Jeffrey Goldberg tells us that six members of the Walton family (the original owners of WalMart) have more wealth than the bottom 30 % of Americans.

This is entirely true and you can make of it what you will. But this is an expression of wealth, a stock, not of income or earnings, which is a flow. This number also isn’t quite what people make it out to be either:

If you’ve no debts and have $10 in your pocket you have more wealth than 25% of Americans. More than that 25% of Americans have collectively that is.

Maybe that is where Professor Reich got it from: it’s the only one I can think of that comes anywhere near being something that could be garbled into what he actually said.

Consumer spending is 70% of economic activity,

Yes, that’s roughly true.

According to the Bureau of Labor and Statistics, the average full-time retail worker earns between $18,000 and $21,000 per year. But if retail workers got a raise, would consumers have to pay higher prices to make up for it? A new study by the thinktank Demos reports that raising the salary of all full-time workers at large retailers to $25,000 per year would lift more than 700,000 people out of poverty, at a cost of only a 1% price increase for customers.

That Demos study was the one that I rather hoped was the result of doobie consumption. Rather than anyone actually stone cold sober cogitating on matters economic. But let’s just again run through the numbers that the Professor provides. US GDP is $15 trillion, consumer spending is 70% of that and raising the workers’ wages would lead to a 1% price rise. Hmm, $15 trillion x 0.7 x 0.01 is therefore the total cost of this wage raise to consumers. $105 billion. We’re getting pretty close to real money here. And how many people do we raise out of poverty by riffling $105 billion out of everyone’s wallets? 700,000 did you say? So it costs us $150,000 per person to get them out of poverty? I am unconvinced that this is a good poverty alleviation measure you know. Really, very unconvinced.

And, in the end, retailers would benefit. According to the study, the cost of the wage increases to major retailers would be $20.8bn — about 1% of the sector’s $2.17tn in total annual sales. But the study also estimates the increased purchasing power of lower-wage workers, as a result of the pay raises, would generate $4-5bn in additional retail sales.

That seems like a good deal.

I beg your pardon? It’s a good deal to raise costs by $20 billion in order to increase sales by $5 billion? In which universe is that true? For whichever one it is it most certainly isn’t this one.

Something I really must make very plain here. Professor Reich’s politics are very different from my own but the above is not about politics at all. US inequality, the paucity of retail wages, the vast wealth and profits of the Walton family: these are not my point at all. I am just running through the actual numbers used in the piece itself. And I am beginning to seriously doubt that Professor Reich is numerate. But that’s near a political statement in itself.

For here’s the real point. The section of The Guardian newspaper that Professor Reich was writing in is called “Comment is Free”. As indeed it is, your opinions are your own and you’re entirely at liberty to broadcast them as you wish. But the second part of the phrase, the very reason the newspaper uses it, is as their one time editor continued “But the facts are sacred”. Yes, numbers are facts and yes, it is important to get them right.

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Sometimes people that were once bright suffer maladies which, other than perverting their intellect to the point of madness, goes undetected in their day to day life. Combine this with a belief that the ends (“social justice”) justify the means (“a personal repeal of the rules of arithmetic”) and you get a Robert Reich. Perhaps with proper medical care he will regain his intellect one day. Until then whenever I see his name associated with a position I simply pass it over without consideration as I would the rantings of a demented uncle at a family reunion.

It is not about the money we don’t have. It is about how society will distribute the money we do have. Mild inflation drives economic growth. without it, there is no growth. Wealth is not stagnant except in a 0 growth economy. The current distribution is equivalent to Mort Main – a dead hand. A balanced budget that is locked in is not a desirable end unless the goal is zero growth and affirmation of the status quo – then only the rich benefit as they continue to further accumulate from the existing pool of money. The Republicans want to lock in this not knowing that it would be disastrous in both the short term and long term. Taxation is a driver of economic growth when it is placed on the wealthy. During the 1950s, the Wealthy paid 90% in taxation and this drove the economic system forward. The current situation benefits only the wealthy and retards rather than rewards innovation and growth.

One may demonstrate a more efficacious distribution through math that would both result in a more stable and happy society, accumulate capital, and be more productive over all than is currently the case. Currently, we have a situation similar to the mort main of the Medieval Church, but in this case it is not necessarily real estate but instead is the vacuum on growth and liquidity caused by an ever increasingly preponderance of wealth and power among a few. This has negative quantitative and qualitative impact on value.

What is the optimum level of convergence? What is the ideal range of income distribution for growth and equity is what I am getting at. There is a convergence level at which wealth is more effective over all and poverty is capable of being mostly eliminated. Capitalism as it now exists is a system that is cannibalistic of other economic possibilities – not because they are less effective but because the nature of this form of economic cannibalism is exclusivity – so that it may disease the economic system and then consume others until it kills the host. The super wealthy act as social parasites once capital has been removed from its primary role as a force of production and is instead stored up as a form of wealth bereft of social liquidity. Mort Main or the Dead Hand sets in and crushes the economic modus vivendi or improvement of living conditions for all. After an excessive period of this activity – social explosions are often the result.

I don’t have a problem with someone having 100 Million: I do; however, have a problem with someone having a billion, 10 billion, and hundreds of billions of dollars in wealth. You are essentially just asking for a few individuals to inflict their biases and prejudices on the rest of humanity with potentially devastating impact. And, I have a problem while others live and die in poverty.